Kerala Colour Lab. Association v. Union Of India

The Judgment of the Court was delivered by

B.N Srikrishna, C.J:— Both these Writ Petitions under Art. 226 of the Constitution of India challenge the imposition of service tax under Finance Act of 1994, as amended by the Finance Act of 2001, on the taxable service provided by a photography studio or agency, in relation to photography, in any manner.

2. Service tax was introduced for the first time by the Finance Act, 1994 and levied on certain categories of services like stockbrokers, general insurers and telephone services. It came to be extended to advertising agencies, courier agencies and pager services by the Finance Act of 1996. The service tax net was widened by adding twelve more services by the Finance Act, 1997. By the Finance Act, 1998, twelve more service were brought within the purview of service tax, namely, Architects, Interior Decorators, Management Consultants, Real Estate Agents, Practising Chartered Accountants, Practising Company Secretaries, Practising Cost Accountants, Security Agencies, Credit Rating Agencies, Market Research Agencies, Under Writers and Mechanised Slaughter Houses. The relevant definitions under the Finance Act are as under:—

S. 65(47): Photography— “Photography includes still photography, motion picture photography, laser photography, aerial photography and fluorescent photography”.

S. 65(48): Photography studio or agency— “Photography studio or agency means any professional photographer or a commercial concern engaged in the business of rendering service relating to photography”.

S. 65(72)(zb): Taxable Service in relation to photography studio or agency.- “Means any service provided to a customer, by a photography studio or agency in relation to photography, in any manner.”

3. Under S. 66, Service Tax is charged at five per cent of the value of taxable services referred in clause (zb) of S. 65(72). S. 67 provides that valuation of taxable service for charging service tax shall be the gross amount charged by the service provided for such service rendered by him. The explanation to S. 67 which provides for inclusions and exclusions of certain amounts. The only relevant clause is clause (b) under ‘amounts not included’, which reads as under:

“(b) the cost of exposed photography film, unrecorded magnetic tape or such other storage device if any, sold to the client during the course of providing the service”;

4. We are not concerned with the rest of the provisions for the present purpose.

5. O.P No. 23689 of 2001 is filed by an Association of Colour Laboratories, whose members are engaged in still colour film developing and printing to different sizes of colour photographs on colour photographic paper from the development films as per custdmers' order. According to the petitioners, their customers are mainly of five types: (i) Freelance photographers, (ii) Studio photographers, (iii) Amateur photographers, (iv) Press photographers and (v) Advertising photographers. It is contended that the services rendered are: still photography such as photographing persons or other subjects in studios and other locations, passport or identification photographs, fashion photos; industrial photographs of machine and buildings etc; photographic service for advertising display, brochures, newspaper advertisement, catalogues; photography of any live event such as weddings, receptions, conventions, fashion shows, sports and news events (news agency services, press photographers being excluded); structures and other surfaces from aircraft or helicopters with the help of cameras mounted on such aircraft or helicopter, laser photography to create holograms; motion picture photography, also known as cinematography to make films, which involves the general compositions of a scene; the lighting of the set or location; the choice of cameras, lenses, filters, and film stock; the camera angle and movements; and the integration of any special effects; fluorescence photography using ultra-violet rays to radiate a surface or substance to identify dyes, stains and markings, specific chemical substances, and fluorescent components in microscope specimens; and any other kind of special photography services. The restoration of old photographs, processing and developing of photographic films and printing of photographs are also included.

6. As far as photo colour labs are concerned, it is pointed out that they develop the negative and supply positive prints in the desired size. In the process, the cost of the material involved and passed on to the customer is far greater than the cost of the service involved. It is submitted that more than 50 per cent of the cost is cost of photo paper which is passed on to the customer. An instance is given that for one 6″ × 4″ size paper print, the amount charged for a print from the customer varies from Rs. 3 to Rs. 5 out of which the paper would cost 90 paise, Customs duty 59 Ps., Excise duty 28 Ps., Sales tax 29 Ps., turnover tax 07 Ps. and cost of chemicals for procession 30 Ps. In addition thereto, there would be other overheads like wages, establishment cost etc. Thus, it is contended that an overwhelming percentage of the gross receipt (varying from 50 per cent to 80 per cent) is directly attributable to the cost of materials, and that the proportion of the value of service is negligible.

7. The contention of the learned counsel is that, in view of the peculiar types of services rendered by colour laboratories, where about 80 per cent of the value of the property passed to the customer consists of costs of photographic film, value of service being negligible, it is wholly erroneous to treat colour laboratories and photography studios as rendering “service”, as understood generally. It is urged that, in all other cases falling under the net of service tax as defined in S. 65(72), the cost of material involved is nil or negligible, the service element being predominant, in the case of the activities carried on by the petitioners, the reverse is the truth. By applying the dominant character test, their activity cannot be considered as a “service”.

8. It is next contended that by applying the pith and substance doctrine, me overwhelming portion of the gross receipts would be by way of sale of goods, which is subject to sales tax under the K.G.S.T Act. Thus, the activities of the petitioners are exigible only to Sales Tax, which falls within the power of the State Legislature under Entry 60 of List II. Consequently, it is urged that the Parliament has no competence to make a law to impose any tax on the type of activities carried on by the petitioners.

9. Another contention is that the definition under S. 65(48) does not include the activity carried on by colour laboratories, which merely process the negatives of customers and cannot be said to be either a “photography studio” or “agency” within the meaning of the definition.

10. The petitioner in O.P No. 30256 of 2001 runs a photography studio and is a member of the All Kerala Photographers' Association, who ekes out his living by running a small photo studio. It is submitted that included in the concept of “photography” are the activities of obtaining permanent image of object on paper or film which involve: (1) making negative film of the object, (2) washing and developing of negative film and (3) printing the image on the paper from the washed and developed film. Since service tax is charged on the gross receipt of photographs, the cost involved in the photographic paper, chemicals, etc. are not excluded from the valuation of taxable service. Photography services are rendered by all photography studios, still film processing laboratories, cinematographic studios/labs who undertake motion picture photography and processing of cine films, holography studios (laser photography) who make holograms, aerial photographers, industrial photographers etc. It is contended that though, in theory, the burden of service tax can be passed on to the recipient of services, in practice, as there is fierce competition in the matter of providing photography services, the service providers like the petitioners will be ousted by individual photographers on account of their competitive edge due to lesser financial burden. The petitioner therefore contended that the tax is discriminative, violative of Art. 14 and imposes an unreasonable restriction on his fundamental right guaranteed under Art. 19(1)(g). It is also urged that the levy is unconstitutional and illegal since the levy is really a tax on the profession, trade, calling or employment, relatable to Entry 60 of List II of 7th Schedule to the Constitution of India. It is contended that valuation of taxable services inclusive of material costs is illegal, unjust and without any basis, unscientific, irrational, and would lead to double taxation since the materials would have already suffered a tax on account of sales tax. Hence also, it is contended that S. 67 of the Finance Act is liable to be struck down as violative of Art. 14.

11. Most of these contentions arise out of misapprehension of the nature of the tax, and, when properly appreciated, dissolve into nothing. It is not possible to accept the contention of the petitioners that service tax is actually a tax on the profession, trade, calling or employment, in pith and substance relatable to Entry 60 of List II of the 7th Schedule. We have already held in our Judgment in O.P No. 22920 of 1998 that for the levy of service tax, the taxable event is the rendering of service, and not the fact of belonging to a profession, trade, calling or employment. A tax on the latter would fall within the exclusive legislative competence of the State Legislature under Entry 60 of List II; the former would be within the legislative competence of Parliament relatable to Art. 248 read with Entry 97 of List I of Schedule VII to the Constitution. See Western India Theatres Ltd. v. Cantonment Board, Poona, Cantonment ., AIR 1959 SC 582 (para. 6 and 7 at pp. 584-585), and the “aspects doctrine” in Federation of Hotel and Restaurant Association of India v. Union of India, (1989) 3 SCC 634 at pp. 652-655.

12. Learned counsel for the petitioners referred to the decision of a Division Bench of this Court in Bavens v. Union of India, (1995) 97 STC 161, and contended that the Division Bench has held that in the case of photographers the property passing to the customer in the photographic paper is only incidental to service contract and no portion of the turnover would be exigible to sales tax. Where a photographer undertakes to develop exposed film handed over by the customer and takes positive prints, or receives processed negatives from the customer and takes positive prints therefrom, and sometime also carries out the work of enlargement, the value of the photographic film being subjected to process or treatment by the photographer would change. Applying the test of accretion to the nucleus, that portion of the increased value of the photograph attributable to the accretion is exigible to sales tax. It is contended that in the case of photography studios, the Division Bench has held that the contract amounts to a works contract. By not considering it as a works contract, and the aspect of transfer of property, Parliament has trenched upon the State's power to impose tax under Entry 60 of List II of Schedule VII. In our view, the contention is totally misplaced. As we have already held, Parliament by imposing service tax has neither taxed the material, nor the sale thereof. What has been taxed is the service rendered by the photography studios and agencies, which was hitherto untouched. We are, therefore, unable to accept that Parliament has no competence to enact the legislation for the levy of Service Tax.

13. The Judgment of the Supreme Court in Rainbow Colour Lab v. State of M.P, (2000) 2 SCC 385, was relied upon by the counsel for the petitioner to contend that the dominant intention test should be applied in deciding whether the contract was a works contract or a contract for sale of goods. Our attention was drawn to Art. 366(29-A)(b) of the Constitution. It is true that this Judgment takes the view that the dominant intention test would have to be applied for deciding whether the contract is simple contract for sale of goods or whether it is a works contract. In our view, that discussion is neither relevant nor conclusive of the point at issue. In the first place, the Judgment in Rainbow Colour Lab (supra) has been doubted by a larger Bench of three Judges in Associated Cement Companies Ltd. v. Commissioner Of Customs, (2001) 4 SCC 593. In Associated Cement Companies Ltd., the Larger Bench pointed out that the principle laid down in Rainbow Colour Lab (supra) runs counter to the express provision contained in Art. 366(29-A), since after the 46th Amendment to the Constitution, the State would now be empowered to levy sales tax even on the material used in a works contract. It is also pointed out in Associated Cement Companies Ltd. (supra) that the principle in Rainbow Colour Lab (supra) runs counter to the decision of the Constitutional Bench in Builder's Association of India v. Union of India, (1989) 2 SCC 645. In any event, this discussion does not really clinch the issue. Once we determine the taxable event as the service rendered, and not the sale of goods, irrespective of whether it is a works contract or a contract for sale of goods, the taxable event would occur. The taxable event occurs because of the service rendered. Merely because the measure or valuation of tax is linked to the gross consideration received in the transaction, it does not determine the nature of tax. The taxable event determines the true event of tax; the measure of tax does not determine the nature of tax, but the quantum of tax which can be levied and collected. The observations of the Supreme Court in Union of India v. Bombay Tyre International Ltd., (1983) 4 SCC 210 : AIR 1984 SC 420 are relevant. Says the Supreme Court:

“…It has long been recognised that the measure employed for assessing a tax must not be confused with the nature of the tax. In Ralla Ram v. Province of East Punjab (1948 FCR 267, AIR 1949 FC 81), the Federal Court held that a tax on buildings under S. 3 of the Punjab Urban Immovable Property Tax Act, 1940 measured by a percentage of the annual value of such buildings remained a tax on building under that Act even though the measure of annual value of a building was also adopted as a standard for determining income from property under the Income Tax Act. It was pointed out that although the same standard was adopted as a measure for the two levies, the levies remained separate and distinct imposts by virtue of their nature. In other words, the measure adopted should not be identified with the nature of the tax”.

14. The argument that there is double taxation also has no substance. Unless the Constitution expressly or impliedly forbids double taxation, as long as the statute is within the competence of the Legislature, double taxation cannot be a ground for invalidating a fiscal statute. In Municipal Council, Kota v. Delhi Cloth and General Mills Ltd., (2001) 3 SCC 654, the Supreme Court rejected the argument based on double taxation by holding:

“22. Though taxation of the same thing under different names is nonetheless ‘double taxation’ in popular sense, the expertise exposition of the topic seems to also lean in favour of the Revenue, in that the Legislature has been considered to possess the power to levy one or more tax or rates of tax on the same taxable event and since in these areas large latitude and wide discretion has always been allowed to the State to choose its own method or kind of tax or mode and purpose of levy and recovery, unless mere is any prohibition in the Constitution or the very law enacted by the Legislature itself prevents such a thing happening no infirmity can be said to vitiate such a levy. Wherever the taxes are imposed by different Legislatures or authorities or where one of the two alone is a tax or where it is for altogether different purposes or when it is indirect rather than direct, there is no scope even for making any grievance of double taxation, at all. In the absence of any impediment specifically created in the Constitution of a country or the legislative enactment itself, the desirability or need otherwise to avoid such levies has been held to pertain to areas of political wisdom of policy making and adjusting of public finances of the State, and not for the law courts, though courts would unless there is clear and specific mandate of law in favour of such multiple levies more than once, in construing general statutory provisions lean in favourof an interpretation to avoid double taxation. So much are the principles or statements of law governing a challenge to any levy on the ground of double taxation.”

15. Nothing can be said to be double taxation, unless there is taxing of the same property or subject twice, for the same purpose, for the same period and in the same territory. To constitute double taxation, the two or more taxes must have been: (1) levied on the same property or subject-matter, (2) by the same Government or authority, (3) during the same taxing period, and (4) for the same purpose. Strictly speaking, there is no double taxation where (a) the taxes are imposed by different States, (b) one of the imposition is not a tax, (c) one tax is against property and the other is not a property tax, or (d) the double taxation is indirect rather than direct. (See in this connection the judgment of the Supreme Court in Sri Krishna Das v. Town Area Committee, Chirgaon, (1990) 3 SCC 645 : AIR 1991 SC 2096. Thus, the contention that imposition of service tax amounts to double taxation and hence is bad, must fail.

16. Finally, the contention based on Art. 14 is also without substance. It is a basic principle of taxing statute that Parliament need not tax all in order to tax some. The Parliament has wide discretion in choosing the objects it decides to tax as long as within the same category there is no discrimination.

17. In Jaipur Hosiery Mills (P) Ltd. v. State of Rajasthan, (1970) 2 SCC 26, while upholding a classification made on the basis of value of sold garments, the Supreme Court pointed out that the Statute is not open to attack on the mere ground that it taxes some persons or objects and not others.

18. In State of Gujarat v. Sri Ambika Mills Ltd., (1974) 4 SCC 656 at pp. 677-78, Mathew, J. quoted Justice Frankfurter in Morey v. Found, 254 US 457 at 472, as follows:

“Statutes are directed to less than universal situations. Law reflects distinction that exist in fact or at least appear to exist in the Judgment of legislators-those who have the responsibility for making law fit fact. Legislation is essential empiric. It addresses itself to the more or less crude outside world and not to the neat, logical models of the mind. Classification is inherent in legislation. To recognize marked differences that exist in fact is living law; to disregard practical differences and concentrate on some abstract identities is lifeless logic.”

19. and concluded (SCC P. 678, para. 67)

“In the utilities, tax and economic regulation cases, there are good reasons for judicial self-restraint, if not judicial deference to legislative judgment. The Legislature after all has the affirmative responsibility. The Courts have only the power to destroy, not to reconstruct. When these are added to the complexity of economic regulation, the uncertainty, the liability to error, the bewildering conflict of the experts, and the number of times the Judges have been overruled by events-self-limitation can be seen to be the path to judicial wisdom and institutional prestige and stability”.

20. In G.K Krishnan v. State of Tamil Nadu, (1974) 4 SCC 656, Mathew, J. approvingly referred to the following observations of the Supreme Court of U.S.A in San Antonio. School District v. Rodriguez, (1975) 1 SCC 375 para. 38:

“Thus we stand on familiar ground when we continue to acknowledge that the Justices of this Court lack both the expertise and the familiarity with local problems so necessary to the making of wise decisions with respect to the raising and disposition of public revenues. Yet, we are urged to direct the States either to alter drastically the present system or to throw out the property tax altogether in favour of some other form of taxation. No scheme of taxation, whether the tax is imposed on property, income, or purchases of goods and services, has yet been devised which is free of all discriminatory impact. In such a complex arena in which no perfect alternatives exist, the court does well not to impose too rigorous a standard of scrutiny lest all local fiscal schemes become subjects of criticism under the Equal Protection clause”.

21. In I.T.O v. N. Takim Roy Rymbai, (1976) 1 SCC 916 (at pp. 922-923, para. 27), the Supreme Court held:

“Given legislative competence, the Legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax. So long as the classification made within this wide and flexible range by a taxing statute does not transgress the fundamental principles underlying the doctrine of equality, it is not vulnerable on the ground of discrimination merely because it taxes or exempts from tax some incomes or objects and not others. Nor the mere fact that a tax falls more heavily on some in the same category, is by itself a ground to render the law invalid. It is only when within the range of its selection, the law operates unequally and cannot be justified on the basis of a valid classification, that there would be a violation of Art. 14.”

22. The above propositions were reiterated by the Supreme Court in Federation of Hotel and Restaurant Association of India (supra, at pp. 660-661). Thus, the statute levying service tax is not liable to be challenged on the ground that it does not impose service tax on free lancers, but imposes it on the photographers having a registered establishment. The contention that free lancers are not required to pay professional tax by registering an establishment under the Kerala Municipality Act and are also free from the burden of service tax, while the photographers having registered establishments are required to pay both, is merely an argument of inconvenience. That the consequence of a fiscal statute can never be the basis of impugning it, is an established principle. While dealing with the challenge to the constitutional validity of an economic legislation, it would be useful to recapitulate the note of caution expressed by the Supreme Court in R.K Garg v. Union of India, (1981) 4 SCC 675 : AIR 1981 SC 2138 at page 690-91, which reads thus:

“laws relating to economic activities should be viewed with greater latitude than laws touching civil rights such as freedom of speech, religion etc. It has been said by no less a person than Holmes, J. that the Legislature should be allowed some play in the joints because it has to deal with complex problems which do not admit of solution through any doctrine or straitjacket formula and this is particularly true in case of legislation dealing with economic matters, where, having regard to the nature of the problems required to be dealt with, greater play in the joints has to be allowed to the Legislature. The Court should feel more inclined to give judicial deference to legislative Judgment in the field of economic regulation than in other areas where fundamental human rights are involved………The Court must always remember that legislation is directed to practical problems, mat the economic mechanism is highly sensitive and complex, that many problems are singular and contingent, that laws are not abstract propositions and do not relate to abstract units and are not to be measured by abstract symmetry; ‘that exact wisdom and nice adaption of remedy are not always possible’ and that ‘Judgement is largely a prophecy based on meagre and uninterrupted experience’. Every legislation particularly in economic matters is essentially empiric and it is based on experimentation or what one may call trial and error method, and therefore, it cannot provide for all possible situations or anticipate all possible abuses. There may be erudities and inequities in complicated experimental economic legislation but on that account alone it cannot be struck down as invalid. The courts cannot, as pointed out by the United States Supreme Court in Secy, of Agriculture v. Central Roig Refining Co. (338 US 604 (1949)), be converted into tribunals for relief from such erudities and inequities. There may even be possibilities of abuse, but that too cannot of itself be a ground for invalidating the legislation, because it is not possible for any Legislature to anticipate as if by some divine prescience, distortions and abuses of its legislation which may be made by those subject to its provisions and to provide against such distorations and abuses. Indeed, however great may be the care bestowed on its framing, it is difficult to conceive of a legislation which is not capable of being abused by perverted human ingenuity. The Court must therefore adjudge the constitutionality of such legislation by the generality of its provisions and not by its erudities or inequities or by the possibilities of abuse of any of its provisions. If any erudities, inequities or possibilities of abuse come to light, the Legislature can always step in and enactsuitable amendatory legislation. That is the essence of pragmatic approach which must guide and inspire the Legislature in dealing with economic issues.”

23. The next contention is that clause (b) of explanation to S. 67, which excludes the costs of unexposed photography film, unrecorded magnetic tape or such other storage devices sold to the client during the course of providing the service from the value of taxable service, is discriminatory in the valuation of taxable service. We see nothing discriminative or violative of the fundamental right guaranteed under Art. 14 in such valuation. The Courts should be very slow in holding that a fiscal statute is discriminatory and violative of Art. 14. By adopting a thumb rule of excluding the elements in clause (b) of S. 67, it is not possible to take the view that there is discriminative legislation so as to attract Art. 14. See Secretary to Government of Madras v. P.R Sriramulu, (1996) 1 SCC 345 para. 15.

24. Finally we come to the argument of infringement of Art. 19(1)(g) of the Constitution. The fundamental right guaranteed under Art. 19(1)(g) is itself subject to reasonable restriction to be imposed under clause (6) of Art. 19. In the first place, we do not think that a fiscal statute, per se, imposes a restriction on the practising the profession or carrying on any occupation, trade or business. It merely renders the person doing so liable to pay tax. Secondly, it cannot be gainsaid that the levy of tax, even if construed as a restriction on the carrying on the occupation, trade or business, is in the interest of raising revenue, and, consequently, in the interest of general public at large. That the legislation is reasonable is obvious, when the rate of tax levied is merely five per cent of the gross value of the taxable service. We are, therefore, unable to accept the contention that service tax imposed on the petitioners imposes any unreasonable restriction on the fundamental right guaranteed under Art. 19(1)(g).

25. The decision in Hindustan Shipyard Ltd. v. State Of A.P ((2000) 6 SCC 579), was relied on by the counsel for the petitioners. This Judgment merely says that there cannot be a straight jacket formula for deciding whether a contract is for sale of goods or a works contract as the intention of the parties is to be ascertained by an overall reading of the several terms and conditions of the contract, and no one of them is decisive. This Judgment is an authority on how to distinguish a “contract of sale” from a “works contract”, but, it hardly applies to the issue before us.

26. For the aforesaid reasons, we are of the view that there is no substances in these Writ Petitions challenging the levy of service tax on the taxable service rendered by photography studios and agencies. The Writ Petitions, therefore, fail and are hereby dismissed, with no order as to costs.